Although recreational cannabis is now legal in California, the myriad rules and regulations surrounding it can be challenging to navigate. These new laws have left a lot of real estate professionals wondering what they need to be doing to succeed in this new and often confusing recreational cannabis landscape.

Archer Norris Cannabis attorney Adrian T. Lambie will be participating in a panel on cannabis and real estate for the Urban Land Institute on Tuesday, February 13, 2018. The event will be hosted by Hanson Bridgett in their San Francisco office. Additional panelists include cannabis and real estate professionals who are also working on creating new policy and building businesses for themselves and their clients in California’s new cannabis industry.

Pursuant to Business & Professions Code Section 26013, California’s cannabis licensing authorities; the Department of Food and Agriculture’s CalCannabis Cultivation Licensing program, the Department of Consumer Affairs’ Bureau of Cannabis Control, and the Department of Public Health’s Manufactured Cannabis Safety Branch were empowered to make “reasonable rules and regulations” in order to “implement, administer and enforce” the Medical Marijuana Regulation and Safety Act.

And so the three licensing authorities did just that. In early 2017, they began the emergency rulemaking process. After holding stakeholder meetings across the State and accepting public comments, a first set of drafts was published in the Spring. They were soon retracted however, following the passage of the Medical and Adult Use of Cannabis Regulation and Safety Act (“MAUCRSA”), which merged the medical cannabis and recreational/adult use cannabis laws. In November of 2017, the revised emergency regulations were released to the public; the MCSB Emergency Regulations, the BCC Emergency Regulations and the CalCannabis’ Emergency Regulations of Cannabis Cultivation, regulating every aspect of cannabis business in California.

The key word for all the new State Cannabis License applicants in Business & Profession Code Section 26013(a) is “reasonable.” As stated above, the rules and regulations promulgated by the State must be reasonable. And given the complex, unique and original nature of this new industry, that is no small burden for the government drafters to achieve. But what exactly does “reasonable” mean?

Section 26013(c) proffers a definition what “reasonable” means in the context of the State’s cannabis laws. That section reads:

“Regulations issued under this division shall be necessary to achieve the purposes of this division, based on best available evidence, and shall mandate only commercially feasible procedures, technology, or other requirements, and shall not unreasonably restrain or inhibit the development of alternative procedures or technology to achieve the same substantive requirements, nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson.” [Emphasis added.]

The set of emergency regulations total 264 pages of regulatory provisions governing all forms of cannabusiness in California. At 264 pages, the regulatory requirements placed on commercial cannabis operations are voluminous and will present a tremendous challenge for any business aspiring to run a fully compliant and lawful operation. And with so many intricate and complicated regulatory requirements, it will be extremely costly and difficult to operate in full compliance. So, the question lingers. Are the draft regulations reasonable? Are they commercially feasible or are they so onerous that operation of a cannabis business would deter a reasonably prudent businessperson from entering the industry?

The grumblings of the industry have begun. Many would-be entrepreneurs have already passed on entry into the cannabis business world due to the perceived difficulty and exorbitant cost to comply with the new regulations. And still, the regulations must balance the State’s duty to the public interest to create a safe and responsible industry involving a potentially dangerous controlled substance against their duty to enact reasonable regulations which do not render cannabis operations commercially unfeasible.

But, as emergency regulations under the pertinent provision of the Government Code in the Administrative Procedure Act, they will expire after 180 days (and a potential two 90 day extension periods), during which time, as part of the regular rulemaking process, including another round of public comments, permanent regulations will be filed with the Office of Administrative Law for enactment estimated to occur in the Spring of 2018. The same requirement of reasonableness will apply.

The State has expressed a sincere desire to avoid over regulation of the cannabis industry and have been careful to follow the rule making process by conducting research, stakeholder meetings and considering public comment. But it will not be until the dust settles and the industry is in full swing, will the answer to the question of their reasonableness become apparent. And if the final regulations are so onerous as to have a chilling effect on California cannabis business, recourse will only be found through a challenge to the regulations for violation by the State of Section 26013(c).

On January 1, 2018, California celebrated a historic and long awaited green day of reckoning. Legalized sale of cannabis to adults over the age of twenty-one.

California’s new state agency, the Bureau of Cannabis Control (“BCC”), along with the Department of Public Health and Department of Food & Agriculture, led by BCC Chief Lori Ajax, former Chief Deputy Director of the California Department of Alcoholic Beverage Control, took us into the regulated cannabis market, on January 1st. Empowered by the Medicinal and Adult Use of Cannabis Regulation and Safety Act, California surged into the new frontier of state licensed commercial cannabis operations and the promise of hundreds of millions of dollars in tax revenue, even by the most prudent estimates.

Over 400 businesses statewide received their state licenses and opened their doors to long and cheerful lines of adults over 21 on New Year’s Day. It was a warm January morning, even by California standards. The first retail sales soared and the first tax dollars were collected in sales tax, cultivator tax and a cannabis excise tax under the new laws.

The State was approving, the industry was encouraged and the consumers were satisfied.

And it lasted 3 days.

Then, using typical institutional intimidation tactics, the federal government waited until just after the program launched before descending upon the industry with guns a’blazing.

On the morning of January 4, 2018, the much maligned United States Attorney General Jeff Sessions issued a memorandum to all United States Attorneys declaring war against legalized cannabis by rescinding a series of previous memorandums, known collectively as the Cole Memos, which instructed U.S. Attorneys to remain hands off of lawful state medical marijuana activities. This federal mandate was first adopted in 2009 and gave medical marijuana businesses some peace of mind and security that, so long as they operated lawfully in their respective States, they would not be a prosecutorial priority for the United States government.

By issuing the new memorandum, Sessions explicitly restored the Department of Justice to a 1980’s standard of prosecution making it quite clear that the failed and disparately damaging War on Drugs will continue. Sessions has granted each State’s US Attorney the wide discretion to prosecute the “cultivation, distribution, and possession” of marijuana because it is a “serious crime” and “dangerous drug,” regardless whether the conduct is lawful under State law.

Sessions stated, “It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance [Cole Memos] undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission. Therefore, today’s memo on federal marijuana enforcement simply directs all U.S. Attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country.”

Failing to recognize the ever growing and irrefutable body of science proving the vast medical benefits of cannabis and failing to recognize the millions of Americans supporting medical marijuana, not just in California but throughout the country, Sessions has repudiated States’ rights and the will of the American people.

So in just 72 hours, California went from Green Day to Green Frost. Sessions’ memorandum sent a deep chill through the bones of the legal cannabis industry and certainly to the brand new recreational/adult use industry. In an instant, the 400 or so cannabusinesses that had just been granted Adult Use licenses to operate in California began to rethink the wisdom of their decision to do so. Big money investors from Silicon Valley to Los Angeles immediately froze in their tracks.

California officials have already spoke out against the move. BCC Chief Lori Ajax recently stated, “The administration is conferring with the California Attorney General and other states in response to this action. We expect the federal government to respect the rights of states and the votes of millions of people across America and if they won’t, Congress should act. Regardless, we’ll continue to move forward with the state’s regulatory processes covering both medicinal and adult-use cannabis consistent with the will of California’s voters, while defending our state’s laws to the fullest extent.”

But the damage is done. The medical marijuana industry has always been complicated since its start in 1996 with the passage of California’s Compassionate Use Act. And if California’s open arms and progressive mentality seemed too good to be true, it turns out it’s because it was. The industry is again frozen with fear. Was the issuance of the new memorandum by Sessions just a political publicity stunt and attempt to instill fear and apprehension into the cannabis industry? Or will the government now look to slaughter a sacrificial lamb and send a real message to all others who dare to continue to assert their State right to operate?

A high profile federal prosecution may well be the next logical step in the systematic advance and enforcement of federal law in a revitalized but still misguided War on Drugs. And if so, who will it be? That very question is the most chilling to every person and business looking to be a part of the otherwise promising medical and recreational cannabis industry in California and other legal states.

The medical marijuana industry in California will remain intact, at least until January 19th, under the Rohrabacher–Blumenauer Amendment, originally introduced as part of the federal government’s 2014 Consolidated Appropriations Act and continued to January 19, 2018 in the government’s recent stopgap spending bill. Under that amendment, the Justice Department is barred from using resources to prosecute state-legal medical cannabis. In August 2016, the 9th US Circuit Court of Appeals, which includes California, ruled that the provision also protects individual businesses that comply with state law. While this may provide protection from federal prosecution to lawful medical marijuana businesses, it affords no protection to state authorized recreational/adult use cannabis operations.

Whether the Rohrbacher-Blumenhauer amendment will be included in the 2018 Federal Budget remains to be seen and will provide little relief to the State’s medical marijuana community until confirmed. If it is blocked from inclusion, the entire legal cannabis industry will be stuck in a state of uncertainty and apprehension. The risk of participating for all may likely outweigh the benefits. And, as usual, it will be the People of California (the seriously ill patients in need of safe access to quality medicine, as well as the interested recreational users of cannabis) who will bear the brunt of the harm.

In any event, the only complete cure to thaw the icy frost would take an act of Congress removing cannabis from Schedule 1 of the Controlled Substance Act and legalizing it federally, which may be more likely now that AG Sessions has drawn the line in the sand. Then, and only then, will the courageous pioneers of the burgeoning cannabis industry operate without the fear of federal intervention and with the same equal protections afforded to all other lawful businesses. When that day arrives, all Americans will finally have the access to cannabis, both medically and recreationally, they desire and demand.

About

As seasoned lawyers for California business, Archer Norris offers transactional business and commercial litigation services to meet the needs of the state’s burgeoning medical and recreational cannabis industry.